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Milbank
Air Transport, Air & SpaceLaw and RegulationConference
Satellite Financing –Current Challenges
Abu Dhabi, UAE16 April 2009
Maria BuzduganMilbank, Tweed, Hadley & McCloy, LLP*This presentation is being made in my personal capacity and not as an associate at Milbank, Tweed, Hadley and McCloy LLP.
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Outline
I. State of the Industry
II. Satellite Financing – Specific Elements
III. Current Trends in Satellite Financing
IV. What Will the Future Hold?
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I. STATE OF THE INDUSTRY
There’s No Business Like Space Business
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Key Satellite Industry Segments
• Satellite Services• Satellite Manufacturing (SS/L, Thales
Alenia, Boeing, Orbital Sciences)• Launch Industry (Arianespace, Sea Launch,
ILS, China Great Wall, MHI, SpaceX)• Ground Equipment
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Satellite Services• Mobile (Inmarsat, Iridium, Globalstar)
– Mobile Data– Mobile Voice
• Fixed and Other Broadband (Intelsat, SES, Eutelsat, Telesat)– End-User Broadband– Private Networks Management Services– Remote Sensing (Digital Globe, GeoEye, Imagesat)
• Broadcasting (DirecTV, Dish Network, Sirius XM)– Satellite Television– Satellite Radio
• Navigation and Geo-Positioning (GPS, Galileo)
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State of the IndustryWorld satellite industry revenues reached
US$123 billion in 2007.Average annual growth of 11.5% for the period
of 2002 through 2007 and 16% between 2006 and 2007.
Satellite Services are the driver of the industry, accounting for 60% of the revenues in 2007.
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Strong Financial Results in 2008Leading FSS operators reported that demand for satellite
capacity and associated services has increased in every part of the world during 2008.
7%$4.3bTelesat7.9%$4.9bEutelsat6%$8.2bSES8%$8.8bIntelsat
Revenue Increase 2008 vs. 2007
Capacity backlog FSS Operator
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Strong Financial Results in 2008 (cont.)
The MSS Sector also reported robust numbers:• Iridium –23% revenue increase in 2008 compared to 2007
• Inmarsat – 13.9% revenue increase
Satellite Orders and Launches Up in 2008• 21 commercial satellite orders (including one for a
constellation of 16 satellites), an increase from last year’s 18 orders
• 41 commercial satellites were successfully launched, compared to last year’s 22 launches.
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Satellite Industry: Proof of Resilience in Economic Downturn or a Case of Delayed Reaction?
Q: What is the vulnerability of the commercial space industry tounfavorable market conditions?
• One view is that the satellite sector performance indicates a fundamental robustness and flexibility to weather business cycles given the robust global demand for consumer satellite applications, mobility and convergence, including high-definition television, high-speed Internet, GPS/navigation-based services and broadband content.
• Others argue that generally the satellite industry indicators lag behind broader economic cycles by 18 months or more, reflecting what are typically multiyear, fixed-price contracts used to lease transponders on satellites.
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II. SATELLITE FINANCING
SPECIFIC ELEMENTS
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Capital Requirements for Satellite Projects
1
Space Segment – Satellite(s) in Orbit- Construction of the satellite(s) - Launch services
Ground Segment - TTC&M
(tracking, telemetry, control and monitoring)- Uplink and downlink facilities- Network control centers- Gateways
Insurance - Launch and In-Orbit Insurance - Third Party Liability In-Orbit Insurance
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Types of Risks in Satellite Financing
1. Credit Risk- Creditworthiness of satellite operator (e.g., start-up versus
established operator)- Assessment of market/business plan
2. Technology Risk- Well-proven versus insufficiently-tested technologies- Insurability/extent of exclusions
3. Political and Regulatory Risk- Applicable to operator and the market- Applicable to satellite manufacturer and launch services provider
4. Market Risk- Fluctuation in demand for specific satellite services/competition- Inflation/Deflation/Currency exchange rate
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Traditional Satellite Financing Structures
• Recourse Credit Facilities• Project Financing• Export Credit Agencies and Multilateral
Agency Supported Credit Facilities• Capital Markets Debt and Equity
Offerings• Manufacturer Support/Vendor Financing
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Project Financing
Satellite project financings have followed traditional principles for project-based structures.– Cash flows– Construction risk– Political Risk
• Recent example of Project Financing: New Dawn Satellite Company/ $240 million financing secured by 85% non-recourse debt project finance (arranged by Nedbank and the Industrial Development Corporation of South Africa) and 15% equity
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Export Credit Agency and Inter-Governmental Agency Support• European and US export credit agencies:
Coface of France, ECGD of the UK, SACE of Italy and the Export-Import Bank of the US
• Recent Example of Export Credit Agency Support: Coface guaranteed 90% of a proposed US$574m senior secured credit facility from a syndicate of approximately five banks led by BNP Paribas, Natixis and Societe Generale for Globalstar (March 2009).
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Manufacturer Support/Vendor Financing
• Customary payment plan for satellite manufacturers and launch services providers provides that the price is fully payable before launch
• Support from manufacturers and providers may take various forms:– Payment schedule (backloading of installments, deferral post-
launch and incentives)– Vendor financing– Guarantees– Equity– Ownership interest retention in satellite (transponders)
• Example of Recent Vendor Financing: arrangement between Thales Alenia Space and Gazprom for the procurement of Yamal-401 and Yamal-402 satellites (February 2009)
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Security Interests in Satellite Financings
1
The value and quality of collateral determines the availability and the financing terms and conditions
Collateral Package in Satellite Project- Orbiting satellites- Ground facility and equipment used for tracking, telemetry and
control, including underlying real property- Ground segment infrastructure (e.g. gateways, network operation
center and interconnection facilities)- Intellectual property rights and licenses needed to operate the
system- Governmental authorizations and licenses needed to operate the
space and ground segments- Supply contracts (satellite and ground segment manufacturing
agreements, launch services agreement and service contracts)- Revenue-generating agreements (transponder lease agreements
and capacity agreements)- Launch and in-orbit insurance/proceeds
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Perfecting Security Interest in Collateral
• Rules of perfection of security interests in satellite or transponders in space are subject to the law applicable to the security document.
• Draft UNIDROIT Space Protocol – attempt to develop international uniform rules to address the recognition of foreign security interests in mobile equipment across international frontiers.
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Events of Default in Satellite Financings
• Failure to obtain, maintain, renew or comply with all required licenses, permits, approvals
• Material breach or termination of any material project agreement.
• The frequency or orbital slot assigned to the system is for any reason not coordinated by affected telecommunications administrations resulting in the entry of the satellite in the Master Registry of the ITU Radiocommunication Bureau.
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III. CURRENT TRENDS IN SATELLITE FINANCING
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Representative Satellite Bank Credit Facilities - 2008
December$240MNedbank Capital, Industrial Development Corporation of South Africa
New Sawn Satellite
October$50MLiberty Media, Intelsat NPTC, Kleiner Perkins Caufield & Byers
WildBlue Communications
August$1.2BBNP ParibasAl Yah Satellite Communications Company (Yahsat)
July$500MHarbinger Capital PartnersSkyTerra/Mobile Satellite Ventures
May$200MDBS Bank, ING BankIndoSat
May€550MABN Amro, Bank of Tokyo Mitsubishi, BNP Paribas, Fortis Bank
SES Global
April$40MCredit SuisseJefferies & Co.
ProtoStar Ltd.
March$40MJefferies FinanceICO Global
February$300MEchoStar Corp.Harbinger Capital Partners
TerreStar Corp.
February$5.1BCredit Suisse, Banc of America, Morgan StanleyIntelsat
DateAmountArrangers/UnderwritersCompany
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Representative Satellite Capital Markets Debt Offerings - 2008
July$778.5M (6 year)JPMorgan, Morgan Stanley, UBSsenior notesXM Satellite
July$2.805B (9 year) senior; $2.231 (9 year) senior PIK
Credit Suisse, Banc of America Securities, Morgan Stanley
Rule 144A senior/senior PIK notes
Intelsat (Bermuda)
June$692.825M (7 year) senior; $217.175M (9 year) senior sub.
Morgan Stanley, UBS, JPMorgan Chase, Scotia Capital, Jefferies & Co.
Rule 144 A senior notes and senior subordinated notes
Telesat Canada
May$750M (7 year)Credit Suissesenior notes EchoStar DBS Corp.
May$2.5B (8 year)Rule 144A senior notes
DIRECTV
April$135M (20 year)Merrill LynchDeutsche Bank
Convertible senior notes
GlobalStar
January$150M (5 year)Harbinger Capital Partnerssenior unsecured notes
MSV/Mobile Satellite Ventures
DateAmountArrangers/UnderwritersStructureCompany
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• No IPOs since September 2008.
September$50M (common stock)
Liberty Media, Intelsat, NRTC, Kleiner Perkins, Caufield & Byers
WildBlueCommunications
July$275.5M (common stock)
Morgan Stanley, UBSSirius Satellite
May$112M (common stock)
Hughes Communications Inc.
April$45M (common stock)
Credit Suisse, Jefferies & Co.
ProtoStar LtdDateAmountArrangers/UnderwritersCompany
Representative Satellite IPOs and Other Equity Offerings- 2008
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Arianespace
Debt
Orbital Sciences
NedbankIndustrial Development
Corporation of South AfricaAfrican Development Bank
CASE STUDY - New Dawn Non Recourse Project Financing
Transponder LesseesVodacom International Ltd.Gateway Communications
Africa (UK) Led.Gilat SatcomZain Nigeria
Equity OwnersIntelsat (74.9%)
Convergence Partners (25.1%)
New Dawn Satellite Company
launch contract
satellite contract
Equity Pledge Agreement
$215M
assignment ofproject contracts, insurance policies and transponder leases
long termcapacity leases
Aon ISB (Insurance Broker)Non-recourse loan
launch and in-orbit
insurance policy
$37M
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IV. WHAT WILL THE FUTURE HOLD?
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Future Financing Conditions• With the global debt markets reluctant to fund
anything other than investment grade companies and equity markets falling dramatically, securing substantial financing facilities has become increasingly difficult and has determined the investors to focus more on the fundamental elements of the project. – Business plan viability– Operational excellence– Regulatory challenges– Timely performance of the project contracts
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Likely financings of the near future– Project financing per New Dawn’s model– Export credit supported finance (COFACE, EXIM)– Vendor financings
• In addition, we are likely to see the emergence of new ways of raising financing:– Government-private partnerships– Condosat (Hosted Payload) arrangements– Restructuring through hedge funds and private
equity
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The Future of the Industry
• For now, the satellite market continues to demonstrate remarkable stability and, in some regions, significant growth.
• The Middle East and North Africa are expected to continue to push demand, with what has been described in industry publications as “a voracious appetite for capacity” in a region that is considered “among the world’s most dramatic”.
• The satellite industry has always been bullish in its nature and the current economic downturn may be just another barrier to cross.
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There’s no business like space business
• There may be trouble ahead but the satellite sector remains one of the most robust, forward looking and optimistic industries to be in.
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